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Summary of Moody's Weekly Market Outlook

Core Content

This report from Moody's Analytics provides a comprehensive analysis of current and prospective trends in U.S., European, and Asian credit markets. It highlights the relationship between U.S. leverage, interest rates, and foreign investment behavior, as well as the impact of trade policies and exchange rate movements on economic activity and financial markets.

Main Views

U.S. Market Trends

• Elevated Leverage and Interest Rates: The U.S. economy has seen a significant increase in nonfinancial-sector debt to GDP ratio, reaching 249% in 2017. This has coincided with a decline in the 10-year Treasury yield, indicating that high leverage limits the upside for interest rates.

• Default Rates: The U.S. high-yield default rate is expected to fall from 3.6% in February 2018 to 2.0% by February 2019, suggesting a stabilization in corporate credit risk.

• Foreign Investment in U.S. Bonds:

  • Foreign investors hold a record $3.5 trillion of U.S. corporate bonds, which is 40% of the total outstanding amount.
  • Foreign ownership of U.S. Treasuries has also increased, with foreigners holding $5.6 trillion of U.S. Treasury notes and bonds as of year-end 2017, which equates to 43.7% of the total outstanding marketable Treasury debt.
  • The wide yield spreads between dollar and euro-denominated bonds have attracted foreign investors due to the relatively higher yields on U.S. corporate bonds.

• Impact of Trade Policies:

  • Protectionist policies, such as tariffs, may not be the most effective solution for U.S. manufacturing challenges, as trade disruptions can negatively affect the manufacturing supply chain.
  • The U.S. dollar's depreciation, despite trade policy rhetoric, is not always a direct result of tariffs and can lead to unintended consequences such as higher interest rates and reduced foreign bond purchases.

European Market Trends

• U.K. GDP Outlook: The final estimate for the U.K.'s Q4 GDP is expected to remain at 0.4% q/q, with annual growth at 1.4%. This reflects continued challenges from Brexit uncertainty and weak net trade performance.

• France's Economic Performance: France's GDP growth is expected to remain at 0.6% q/q, with a focus on manufacturing investment and services spending. The country's economic resilience is supported by a rebound in household consumption due to colder weather in February.

• Key Indicators: Various economic indicators, including consumer confidence, business sentiment, and employment data, will be released in the coming week, offering further insight into the region's economic health.

Asia-Pacific Market Trends

• Japan's Economic Activity: Japan's February economic activity data shows signs of weakness, with a sharp 6.6% monthly decline in production in January. The Lunar New Year holiday has disrupted supply chains, making a recovery in February unlikely.

• Regional Outlook: The report suggests that Japan's momentum from the previous year is unlikely to continue in early 2018, as the economic environment remains challenging.

Key Information

• Foreign Ownership of U.S. Bonds:

  • $3.5 trillion in U.S. corporate bonds owned by foreigners as of Q4-2017.
  • $5.6 trillion in U.S. Treasury notes and bonds owned by foreigners as of year-end 2017.

• Yield Spreads:

  • Investment-grade bond yield spreads have narrowed from 129 bp in Q4-2016 to 97 bp in Q4-2017.
  • High-yield bond spreads have decreased from 453 bp to 346 bp over the same period.

• Debt-to-GDP Ratio:

  • The U.S. nonfinancial-sector debt to GDP ratio reached 249% in 2017, slightly below the 2016 record of 250%.

• Trade and Currency Impact:

  • Protectionist policies may not be the best solution for U.S. manufacturing challenges, as they can lead to inefficiencies and reduced trade.
  • A weak U.S. dollar may have negative implications for interest rates and foreign investment in U.S. bonds.

• Economic Growth and Leverage:

  • The U.S. has experienced a decline in economic growth over the past few decades, which has coincided with a rise in leverage.
  • High leverage may help keep interest rates low, but it also increases the risk of economic downturns if interest rates rise.

Upcoming Economic Reports

Conclusion

The report underscores the complex relationship between leverage, interest rates, and foreign investment in the U.S. and global markets. It also highlights the importance of trade policy and exchange rate movements in shaping economic outcomes. While the U.S. economy faces challenges due to its high leverage, foreign investment remains a key driver of demand for U.S. corporate bonds. In Europe, the U.K. and France show mixed economic signals, with the U.K. facing continued challenges from Brexit, while France exhibits some resilience. In the Asia-Pacific region, Japan's economic activity remains weak, with limited signs of recovery in the early part of 2018.